Do As I Do

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An awful lot of attention has been paid lately to “tone at the top.” In September, in his censure of the former CEO, CFO, and president of Freddie Mac, a federal judge claimed the trio had set “an inappropriate tone at the top.” The Public Company Accounting Oversight Board is currently auditing accounting firms to ensure that their executives create the correct “tone at the top.” Even Securities and Exchange Commission chairman William Donaldson recently complained about a failure to set the tone at the top in Sarbanes-Oxley compliance efforts.

But what exactly is tone at the top, and how does one set it?

To Steven Shallcross, CFO of Advancis Pharmaceutical Corp., in Germantown, Maryland, it starts with the little things. Shallcross says he and CEO Edward Rudnic play by the same rules as the rest of the company when it comes to spending, for example. “My office and the CEO’s office are furnished with the same quality of furniture as the vice president’s or the director’s,” says Shallcross. “We don’t have Taj Mahal-type offices.” All phone calls from the road must be made on calling cards to minimize long-distance charges. Employees share printers. And the senior officers’ T&E reports are inspected by outside auditors.

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In addition to such day-to-day fiscal prudence, CFOs also use the capital-budgeting process to illustrate appropriate behavior. “I often tell people that we want to run the business with an attitude of thrift,” says Mary Beth Lewis, CFO at Noodles & Co., a Boulder, Colorado-based restaurant chain. “That means we don’t just go back and add another half a million dollars to the budget for an opportunity that comes up midyear. Something else has to get traded out.” Shallcross expects the company’s service providers to exercise frugality, as well. Recently, for example, he required the general contractor overseeing new office-space construction to present at least three bids for some subcontracted jobs. “I know we saved money,” says Shallcross, who checked just how much by benchmarking against similar work done for competitors.

Ethics Class

In addition to leading by example on the spending side, CFOs also set the ethical tone. “The first message I try to send is that we are responsible for what we produce in the finance department,” says Lewis. “When we come across an accounting issue that needs to be made clear in the footnotes to our financial statements or to the board, we don’t want to take the position that ‘we’ll let the auditors handle that.’ ” To illustrate the point, she is hiring a staffer whose primary responsibility will be to research technical accounting changes and write about how they apply to the company’s financial statements.

To avoid mistakes, Jeri Hilleman, CFO of Symyx Technologies Inc., a Santa Clara, California-based developer of software and tools for scientific experimentation, also believes that rules are an important part of the formula. “You have to set standards and stick to them, and let people know that if something starts to feel like a gray area, they should back away.” And helping employees recognize those areas, says Hilleman, sometimes means getting in the trenches with them. “Communication and prioritization have never been more important,” says the CFO, who regularly checks in with overwhelmed staffers to figure out which projects to tackle first and discuss red flags.

Spreading the right ethical tone throughout the organization, however, requires extending communication efforts beyond the finance department, says Shallcross. He and his finance team meet monthly with development staffers to discuss budgets, deadlines, and forecasts. And they’re not the only ones talking: managers meet every month, vice presidents meet weekly, and the senior managers meet with the CEO three times a week. Nasdaq-listed Advancis also has a disclosure committee that meets twice a quarter to review financial reports prior to their release. With such constant communication, there are plenty of opportunities for staff to raise questions or point out difficult issues, says the CFO, and plenty of opportunities for him to reinforce the importance of honest reporting, transparency, and openness.

Brandt Allen, dean of executive education at the University of Virginia’s Darden Graduate School of Business Administration, recommends that at such meetings CFOs raise the topic of ethical behavior. “From time to time, you have to make sure these issues are on the agenda,” he says, adding that simply having an ethics policy isn’t enough. Allen suggests talking through different scenarios and asking staffers how they would react. “You need to prepare people for some of the most common kinds of issues,” he says, “so they’re not totally caught off guard when something happens.”

Positive Reinforcement

Ultimately, creating an environment where employees feel free to challenge finance decisions is the essence of tone at the top. And it’s up to the CFO to hire staff with the confidence to ask tough questions. After all, says Allen, while senior executives can draw on past experience to handle sticky situations, younger managers may simply “turn around and go back to work” even if they suspect something is wrong, out of allegiance to their superiors.

Reinforcing that confidence also requires emphasizing the importance of finance’s contribution. Hilleman, for example, even encourages a positive attitude about Sarbanes-Oxley requirements by urging staff to look at how the tightened controls, particularly the internal-controls documentation, help the company perform better.

In the end, though, setting the right tone requires a clear vision of the basic values under which you operate, says Shallcross. “One of the big reasons companies with difficulties have failed is that they lacked that basic discipline of understanding where they’re going, how they’re going to get there, and how much it’s going to cost. But well-run companies do that day in and day out,” he says. “It really isn’t tricky.”